Monday, August 14, 2017

Budgets, Money and (Maybe) Peace of Mind

Although everyone ought to work from a budget, how their budget is made is up to each individual. Some people keep a paper budget, others use a spreadsh

eet or app. Below are six different types of budgets, who they work best for, how they work, and a resource to start from.

Envelope Budget
This works best for people who need to control their spending, people who are very visual, or people who deal mainly in cash.

What you do is create sturdy envelopes labeled with spending categories (e.g., rent, utilities, groceries, medicine, transportation, eating out, entertainment). Put the amount you will spend for the coming month into the envelope at the beginning of the month. When the envelope is empty, you have to stop spending in that category.

This budget type also works with other budget types. If you know you tend to overspend in certain areas (such as fast food or movie rentals), you may only need an envelope for particular categories.

This budget type also works virtually. Check out the app Goodbudget which is available on the web or for Android or iPhone.

For simple record keeping based on receipts, try Wally for iPhone or Wally+ for Android: http://wally.me

50/30/20 Budget
This budget method may be the best for you if you are just beginning to use a budget.

It’s simple. You divide your monthly income into three pieces: half (50%) should go to meet your needs. That means rent, utilities, groceries, medicine, and transportation. About a third (30%) will be for “wants” which includes eating out and entertainment, but also things like your cell phone and cable plans and new clothes. The remainder (20%) should be used to pay off debts and add to your savings. Think of this smallest portion as how you’re going to eventually get ahead financially.

Bottom-Up Budget
This is the budget type most useful for people with large fixed expenses, and anyone trying to understand their spending pattern better.

When you have large medical or child care expenses, or a mortgage, you can’t really cut back on that area of spending. Your budget should begin by acknowledging the actual costs of your daily expenses in these categories. The remaining categories are where you can economize, and that amount can go toward savings.

Personal Capital offers a free mobile app that may help with bottom-up budgeting.

Top-Down Budget
The opposite of bottom-up budgeting, this budget style works best for people with a strong savings ethic and specific saving goal, who are able to look at the future as a “big picture.”

This type of budgeting is like the 50/30/20 budget, but you set your own categories and percentages, based on your financial goals and future plans. It takes personal discipline to make this budget plan work.

The idea is to “pay yourself first,” by setting money aside for your saving goals or to pay down your debt. After that, you allocate the remainder of your monthly income to your expenses, until nothing remains. Some people say this is like “giving every dollar a job.”

Consider using a mobile app like You Need A Budget to achieve your goals using this style of budgeting.

Reverse Budget
This budget is not for everyone; it works best for people who already have a financial safety cushion, who are experienced at using a budget, and who have specific savings goals.

Reverse budgeting is similar to zero-sum budgeting because you pay yourself first toward your saving goals. After that, you do away with categorical spending and just pay for everything else as it comes along, knowing that the amount needed for each category will change month to month.

What happens when you don’t keep a budget?
A study by Bankrate found that about 20% of Americans says they budget “in their heads,” which often means “not at all.” This might partly explain why the majority of Americans can’t dip into savings to cover a small ($1000) unexpected expense, let alone a catastrophic financial need.

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